Spinning faster and faster until?

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Paris, Thursday, February 3, 2000 Japan's Debt Could Force Up Rates

-------------------------------------------------------------------------------- Bloomberg News -------------------------------------------------------------------------------- TOKYO - Japan will need to sell at least 30 trillion yen ($278 billion) of new bonds a year for the next five years to pay its interest bill and fund its current spending plan, the Ministry of Finance estimated Wednesday, highlighting concerns that interest rates could jump and choke an economic recovery. The interest on Japan's debt - which the ministry expects will reach 335 trillion yen by the end of March - will chew up a bigger slice of government spending, while tax revenue will rise only slowly amid a mild economic recovery, the ministry said in a report to Parliament.

That makes it unlikely the government will be able to tackle its debt - the biggest among industrial countries - anytime soon.

Government officials have said the main priority is to revive the economy, rather than rein in its debt.

There are few signs that is happening. The economy contracted 1 percent in the third quarter of 1999, after expanding for the first six months. Much of that growth came from state spending on everything from roads to bridges, and tax breaks and cut-price loans for home buyers.

The ministry said bond sales will need to rise to 37.2 trillion yen in 2005, up from 30.2 trillion yen in 2001, allowing for a 2 percent annual increase in spending if the government targets 1.75 percent economic growth a year.

Comment: Increasing debt in a rising interest rate scenario hints at a great need for funds. And likely devaluation of the yen? Anyone care to discuss hyper-inflation.

Could it be the Japanese strategy is to get the proceeds from the bonds to support their social investment and prop their economy and then pay back the debts with cheaper yen?

I wonder who will buy this new debt, maybe the Japanese people after they redeem their US Treasuries? In which case their problem becomes our problem.

Got gold. Got silver.

-- Bill P (porterwn@one.net), February 03, 2000

Answers

>> The [Japanese] economy contracted 1 percent in the third quarter of 1999 <<

Yup. And it is estimated to have shrunk another 1.8% in the fourth quarter, too.

>> Japan to issue US 278 billion in new bonds per year for five years <<

At one time, it was illegal for foreigners to purchase Japanese government bonds. I am not clear whether this restriction is still in effect. Such restrictions would not be compatible with the so-called "big bang" changes scheduled to take place in Japanese finance in the next few years.

However, if that amount of debt needs to be absorbed by Japanese banks, at a time when their loan portfolios are still a smoking ruin, then the banks would probably need to dump US bonds to get liquid enough to oblige the government's need for money. If foreigners *can* buy the bonds now, they will have to be baited with a much higher yield than 2.1%, or else US bond yields will have to come down drastically.

Hmmm. Just a few threads down I was opining that the MOF wouldn't want to float a really big bond issue. Too dangerous, I said. Now this article seems to be giving me the lie. Dang! That's what I get for opening my big mouth.

The year 2000 just gets more interesting all the time.

-- Brian McLaughlin (brianm@ims.com), February 03, 2000.